Super tax breaks in firing line

The Murray Review found 38 per cent of total superannuation tax concessions went to the top 10 per cent of income earners. Photo: Greg NewingtonSuperannuation tax breaks are too generous to the better-off and the tax foregone is growing to such an extent that it has to be tackled.

The Murray Review found 38 per cent of total superannuation tax concessions went to the top 10 per cent of income earners.

That means that taxpayers are providing tax incentives to those who have already saved enough to afford a comfortable retirement and, in many cases, would save for their retirement even if there were no tax breaks.

And the argument that the tax breaks encourage people to save for their retirement and put less pressure on the age pension does not apply, as the wealthy were never going to be picking up a part age pension anyway.

It does look as if the government will include measures in the May budget to restore some fairness to the super system and deliver savings to the budget bottom line.

Out of all of the changes being discussed, a superannuation contributions tax that is equal to a 15 percentage point discount to marginal income tax rates makes most sense.

At the moment, most people pay a flat contributions tax of 15 per cent.

A 15 percentage point discount to marginal income tax rates would mean significantly smaller tax breaks for the better-off who are taking a disproportionate share of the tax concessions.

The highest marginal tax rate of 47 per cent starts at taxable incomes of $180,000 a year. That rate includes the 2 per cent Temporary Budget Repair Levy of 2 per cent applicable on taxable income above $180,000 that is due to end by mid-2017.

Someone on $200,000, for example, but not including the 2 per cent Medicare Levy, currently enjoys a tax break on contributions to super of 32 per cent – 47 per cent minus 15 per cent.

If the change was to go ahead, their tax break would fall to 15 per cent and they would be paying a contributions tax of 32 per cent.

It is the case that those on lower to middle incomes – between $37,000 and $80,000 – would pay contributions tax of 17.5 per cent (marginal income tax rate of 32.5 per cent minus 15 per cent).

An increase in contributions tax for most workers is not going to fly.

While there are many unknowns about what the Budget will contain, the government is going deliver cuts to income tax.

So, depending on the size of the cuts to income tax, it is likely there would be no increase in contribution tax for most workers.

Those on low pay actually pay higher contributions tax than the average rate of income tax they pay.

That is why, at least until mid-2017, the government compensates them with the low-income superannuation contribution.

If the change went ahead that compensation would no longer be needed.

Those earning more than $300,000 a year pay 30 per cent, or double the 15 per cent flat rate. That is another measure that could be scrapped if the change went ahead.